P2-U03 · PART 2 · SOURCE CYCLE 2026-2027

Business Income

Only cards whose complete question and answer were checked against exact primary-authority evidence appear here.

Q1.Alder is legally taxed as the seller and collects the state sales tax from buyers. How is the collected tax treated?

Include it in gross receipts

Q2.Alder operates two separate sole-proprietor businesses. How many Schedules C are generally attached?

A separate Schedule C for each business

Q3.Must an activity actually earn a profit every year to be treated as a trade or business?

No; an actual annual profit is not required when the activity has a profit motive

Q4.In the Schedule C computation sequence, what must be determined before business expenses are deducted?

Gross profit

Q5.How do the at-risk rules generally limit a taxpayer’s loss from an activity?

The loss is limited to the taxpayer’s amount at risk in the activity

Q6.What is the general income treatment when a business debt is canceled and no exception or exclusion applies?

Include the canceled debt in income

Q7.How is net self-rental income treated when property is rented to a trade or business in which the taxpayer materially participated?

As nonpassive income

Q8.What system supplies the principal business activity codes used in the Form 1120-S instructions?

The North American Industry Classification System

Q9.How are net receipts on a business income statement computed in the cited gross-profit illustration?

Gross receipts minus returns and allowances

Q10.Which practice helps prevent commingling business and personal funds?

Keep a separate business bank account and use a proper invoicing system